The uncertainty of Trump’s trade tariffs

At the start of February, President Trump announced a 25% tariff on imports from Mexico, a 25% tariff on imports from Canada (excluding energy, which faces a 10% tariff), and a 10% tariff on imports from China.

The initial market reaction was negative, with equities declining and currencies such as the Canadian dollar, euro, and Mexican peso weakening against the USD.

The tariffs on Canada and Mexico were higher than expected, leading to a loss of confidence in the administration's efforts to maintain economic growth. Initial calculations suggested that the overall impact of these tariffs could result in a 0.5% decline in US GDP. However, it is too early to make definitive conclusions, as the magnitude of the tariffs' impact will depend on their persistence and breadth.

This was confirmed a few days later when an agreement between Trump and Mexico, and later with Canada, was reached to pause tariffs for a month for further negotiation, resulting in a reversal of the initial market reaction. But tariffs are likely to remain a key negotiation point for Trump. 

Eurozone challenges, US exceptionalism

While Europe was not part of the initial round of tariffs, there are indications that Europe's trade surplus may be targeted next. Even without direct tariffs, the overall cyclicality of the Euro area will lead to struggles as the US imposes tariffs to other parts of the world.

Despite these challenges, we remain confident in US equities, with earnings growth driving a significant portion of recent performance.

So far, the earnings season for the last quarter of 2024 has been promising, with 74% of companies reporting earnings per share that beat expectations, and an average earnings surprise of around 4.4%. The Magnificent Seven have outperformed, with an earnings surprise of 5.7%, compared to the rest of the S&P 500, which surprised by 3.9%. 

Divergent central bank policies

The Fed kept rates on hold in their recent meeting. There was little market reaction, given that it was broadly expected. The market is now anticipating the next rate cut to occur in June.

We do not expect any rate cuts to address growth concerns stemming from tariffs unless the disinflation process remains on track. The most recent inflation print showed further progress in shelter inflation, which has been one of the more persistent components of US inflation, and the Atlanta Fed wage growth tracker fell close to 4%.

In contrast, the European Central Bank (ECB) proceeded with another rate cut. We remain confident that the ECB will continue to cut rates, as President Lagarde acknowledged, the economy is facing headwinds but expects a recovery over time, supported by the easing of past monetary policy restrictions. 

Bank of England balancing act

For the Bank of England (BoE), the market was widely anticipating a rate cut due to concerns over a stagnating economy. However, persistent inflation leaves little room for the BoE to engage in an aggressive rate-cutting cycle. This delicate balancing act requires the BoE to stimulate economic growth while avoiding a resurgence in inflation, posing a significant challenge.